Comments on the Blumenthal McMahon Debate

The debate organizers opted not to include me as the representative of the third largest political party in Connecticut, the Independent Party. I did, however, watch the proceedings on television. We are in an economic emergency, and I’m running for the US Senate strictly as a matter of conscience to offer my knowledge, experience, and proposals to fix our broken economy and create the 20 million new jobs we desperately need. To that end I offer my comments.

But let me first respond to the question on the death penalty. Both candidates proclaimed their unconditional support for it, while I am categorically against it. That fact that more than 100 convicted murderers on death row have been found not guilty and released after DNA testing became available is reason enough for me to ban this unnecessary measure which has likely put to death untold numbers of innocent people.

With regard to jobs and the economy, both candidates recognized that small businesses account for about 70% of private sector jobs, and both candidates proposed a variety of tax measures to help small business. And while both candidates favored not letting middle income tax cuts expire next year, and Mrs. McMahon further supported not raising taxes on anyone, neither of those proposals actually lower taxes from their current levels.

Sadly, the problem is that neither candidate recognizes that it is SALES that create jobs. Consequently, they did not focus on proposals designed to increase sales. Restaurants, department stores, and other small businesses don’t cut staff when sales are good and they are full of paying customers. They cut staff when sales fall. We’ve lost 8 million jobs because sales fell and business in general remains slow. So while Mrs. McMahon stated that entrepreneurial activity is what creates jobs through risk taking, she failed to recognize that they do that only when prospects for actually selling their goods and services are favorable, and, particularly, when they have a backlog of orders.

Thus, while lowering taxes for small business certainly doesn’t hurt, it’s not what creates jobs. My lead proposal to create millions of new jobs is a full payroll tax (FICA) suspension for both employers AND for all employees. This will increase take home pay by about 8% which means a person earning $50,000 a year will see his take home pay go up by over $300 per month, which will boost sales and create jobs the right way, from the bottom up, and not from the failed top down trickle down bailout policies of the last several years. It also lowers costs for all businesses, which helps keep prices down. We have to take strong measures to get sales back up to where they should be.

Next, I want to address one of the more famous sound bytes from this debate. Mrs. McMahon specifically stated that “government doesn’t create jobs, the private sector does” and Mr. Blumenthal did not disagree. What both candidates failed to recognize is the government’s central role in private sector job creation. Government’s role is the creation and maintenance of public infrastructure necessary for the functioning of the private sector. This includes in the general sense the legal system, the monetary system, public safety, and other related and essential support functions. This infrastructure employs real people in real jobs providing real benefits without which there would be no viable private sector. So in that sense government does indeed create real jobs, both directly and indirectly.

In summary, neither candidate showed that they understood that sales create private sector jobs, and neither candidate directly proposed measures such as my payroll tax suspension for employees to increase our spending power to restore sales and create jobs. Instead, they proposed measures that certainly won’t hurt, but will fall far short of what’s needed to put America back to work.

Next, Mr. Blumenthal repeatedly called for policy to force China to end its ‘currency manipulation,’ along with ‘buy America’ proposals and proposals to reverse the flow of American jobs overseas, to the point of criticizing Mrs. McMahon for purchasing imported goods. Mrs. McMahon implicitly agreed with the premise, countering by explaining that US corporate tax policy was to blame for companies moving overseas. Again, unfortunately, both candidates have things fundamentally backwards on this issue as well. I suspect that is because the unions they are undoubtedly catering to also have it backwards and are sadly working against their own best interesets.

The real problem is not the imports, or the jobs going overseas. The problem is that we are grossly over taxed for the size of government we have, and don’t have enough take home pay to buy enough goods and services to keep everyone at home fully employed.

As every Professor of Economics knows, and every first year student is taught, imports are real benefits and exports are real costs. You can think of each nation’s real wealth this way: take the ‘pile’ of goods and services we produce at home, then add to that pile the goods and services the rest of the world sends us, then subtract from that the pile of goods and services we send overseas. What we are left with is our real wealth. As you can see, the problem is not what we buy from overseas. That adds to our pile and makes us richer. The problem is the unemployment here at home, which is best addressed by my payroll tax suspension which gives people working for a living enough spending money to increase sales enough to create the jobs we need here at home. The trick is to get taxes low enough so that we have enough spending money to buy everything we can produce here at home with everyone working, plus everything the rest of the world wants to sell us.

In the debate, both candidates also stressed the importance of deficit reduction, with both concerned about the debt we are leaving our children. The problem is that they have both bought into the deficit mythology that has gotten the U.S. economy to where it is today. In order to restore American prosperity create American jobs it is critical to dispell this mythology, and I am on mission to stomp it out forever.

The fact is that the U.S. government is not ‘out of money’ or ‘about to go broke.’ That talk is pure fear mongering. Unlike state and local governments (which can go broke), the Federal government is the actual issuer and operator of the US dollar. It utilizes its Federal Reserve Bank and the commercial banks (where all of our bank accounts are) to make payments and receive payments. It makes all payments, such as Social Security payments, simply by marking numbers up in our bank accounts. Those numbers don’t come from anywhere, as Fed Chairman Bernanke testified last year and other Fed officials have repeated. There is no gold coin that drops into a bucket at the fed when you pay your taxes and they don’t hammer one into their computers when they pay a Social Security check.

To repeat: There is no such thing as the Federal government running out of money. Government checks don’t ever bounce.

That is not to say that ‘over spending’ can’t drive up prices and eventually result in inflation. It does mean, however, that Social Security is not broken. It can’t be. The checks will never bounce. And I have signed a pledge never to cut Social Security benefits or eligibility. However, unfortunately for all of us, there is a commission on “fiscal responsibility and reform” supported by the Democrats and the Republicans, which, conveniently after the election, will recommend ways to cut Social Security and Medicare. An important part of my mission is to make sure they do not succeed.

Often, when I explain this, people will ask if I am proposing that we just ‘print the money,’ as if today there is a distinction between printing money and some other way of government spending. I tell them that ‘printing money’ is a long outdated gold standard distinction that meant we had printed more paper money than we had gold backing it. Today, you can’t ‘cash in’ your dollars at the Fed for gold. Dollars are just numbers in bank accounts, or actual cash. So all I’m doing is describing the one and only way spending and taxing always takes place with today’s monetary system.

The other question that seems to be on everyone’s mind is how then do we pay off China? The answer is actually quite simple when you understand how it works in its most basic form.

First, one has to understand China doesn’t start out with any dollars. They get them from selling things to us. When China gets paid, those dollars go into its checking account, which is also called a reserve account, at the Fed (Federal Reserve Bank). US Treasury securities including T bills, notes, and bonds are nothing more than savings accounts at the Fed. So when China buys Treasury securities all that happens is their dollars shift from their checking account at the Fed to their savings account at the Fed. That’s called ‘the US going into debt.’ You can call it whatever you want, but it is really just transferring dollars from China’s checking to its savings. The total US debt of about $13 trillion is simply the dollars in savings accounts at the Fed. And how is that repaid by the tens of billions every week as the various Treasury securities mature? All the Fed does is shift those dollars (plus interest) from the savings accounts back to the checking accounts. That’s it, debt paid. And no checks from anyone’s children and grandchildren are involved. But what if China decides not to ‘buy our debt’? This simply means their money stays in their checking account at the Fed and never goes to their savings account. There is no reason for anyone to care in which Fed account China’s dollars are kept. Further, if China doesn’t want dollars at all, their only option is to buy something with them just like anyone else.

All of this causes one to view deficit spending in a very different light. Deficit spending for the Federal government is very different than most people imagine. When the Federal government spends more than it taxes, that extra money spent simply winds up in savings accounts at the Fed. In other words, it adds to the savings of the economy. With this in mind and knowing that, by definition, deficit reduction means either increasing taxes or cutting spending, we can see that both of those actions take money out of our economy – the worst possible thing to do at a time like this. While I strongly favor cutting wasteful and unnecessary Federal spending, I also recognize that with today’s high unemployment any spending cuts must be matched by tax cuts of at least that much to ensure money is not removed from the economy. What actually matters is the real economy, and not the deficit which is nothing more than the savings accounts at the Federal Reserve Bank. Don’t you think that if the debt was really a problem something very bad would have happened long before it got to $13 trillion?

Mrs. McMahon’s nonsensical statement about using unspent stimulus money to pay down the national debt would be like saying you are going to use your remaining line on your credit card to pay off your debt. And Mr. Blumenthal’s failure to respond to such an obvious absurdity likewise shows he too is sorely lacking in his understanding of economics and job creation at this time of economic emergency.

The health insurance issue again highlighted their lack of understanding of markets and economics for all parties concerned. Both candidates missed the point that there is not yet an operational plan to guarantee coverage for those with pre existing conditions. The problem is that if you can’t be turned down for insurance because you are already sick, you don’t need to buy insurance until AFTER you need medical attention. To address that situation, they’ve discussed fining people who don’t buy insurance. But if the fines aren’t at least as high as the insurance premiums, people will just pay the fines. And then insurance companies will only be selling insurance to people already in need of treatment, which means the premiums will be higher than the costs of the needed treatment to cover the insurance company’s costs. Unfortunately, however nobly intended, the entire concept is unworkable under the current structure, and neither candidate indicated any awareness of this.

With regard to TARP funding for banks, again, neither candidate got it right. The fact is TARP was nothing more than regulatory forbearance that allowed the banks to continue to function with reduced levels of private capital, along with terms and conditions regarding operations, compensation, etc. No additional public funds were actually involved. The FDIC was, for all practical purposes, already guaranteeing the depositors from loss should all the private capital of any one bank be lost. Adding TARP money to secure depositors from loss when they were already FDIC guaranteed made no sense at all and added nothing. Nor did ‘paying back the TARP money,’ which necessarily did nothing more than let funds sit in reserve accounts at the Fed, make any difference.

To summarize the economic issues, neither candidate showed that they understood that sales create private sector jobs, and neither candidate directly proposed measures such as my payroll tax suspension for employees to increase our spending power to restore sales and create jobs. Instead, they proposed measures that certainly won’t hurt, but will fall far short of what’s needed to put America back to work. During this time of financial crisis, even with the best of intentions, neither candidate is qualified to represent our best interests and fix our economy.

Mr. Blumenthal has been a tireless public servant and advocate for the people of Connecticut for a very long time, and I have no doubt he’ll continue to do that if elected Senator. Unfortunately, much of his understanding of current issues is completely backwards. For example, his tireless and well-intentioned efforts in regard to foreign trade are far more likely to destroy jobs than create them. And nothing could be more subversive than Mrs. McMahon’s promised vote for a balanced budget amendment, which would take over $1 trillion out of our economy, destroying tens of millions of jobs, and threatening our liberties as well in the ensuing social unrest that.

We are in an economic emergency, and both candidates have put forth proposals that would unknowingly destroy millions of jobs in a terrible depression. I am running for the US Senate solely as a matter of conscience as the candidate uniquely qualified to support the proposals that will create the 20 million jobs we need, and defeat the forces at work that are attempting to slash Social Security and Medicare.

Also, unlike the other candidates, creating jobs has been my life work, and not just election talk. My published writings and proposals have already created millions of jobs around the world, and I have met regularly with Congressmen and Senators from both parties promoting full employment and prosperity, as well as fighting back against the proposed cuts to Social Security and Medicare.

I urge you to please visit www.moslerforsenate.com and read my proposals, my qualifications, and my endorsements.

About Author

Your forbearance equivalence proposition is like a credit default swap for live banks. TARP was a capital injection. Both provide additional insurance against losses for live banks, beyond their private capital position. TARP provides the cash up front, like a fully collateralized CDS. FDIC is for dead banks.

Good write up, especially on China. The checking account/savings account thing works very well.

The print money thing doesn’t. It’s tired.

“No additional public funds were actually involved”

Huh? Actually, they were. Don’t understand your section on TARP payments and repayments at all. Both were Treasury cash flows to be treated like any other for reserve management purposes – i.e. no necessary net effect on the system reserve position.

just two (consecutive) paragraphs that I’d comment on.
The one section where you don’t lay out a “solution” is health insurance, I figure the best answer is something like…

“I am against with the President’s Medicare cuts. We should be expanding it instead.”

You’re agreeing with conservatives by Obama’s healthcare bill and you’re agreeing with liberals that Medicare should be expanded. In this context, “expanded” could mean Medicares budget should be increased (if only to undo Obama’s reductions), or its coverage benefits widen or that it should be offered to a wider group of (if not all) Americans.

The next section uses the term regulatory forbearance, which is word salad to most people. FDIC’s preexiting duty to protect bank customrs is a good thing to point out. Like say…

“The government has had a preexisting duty to protect bank customers since the New Deal, at no time were the savings of any America at risk. The TARP bailout wasn’t necessary because the Federal Reserve already had the power to regulate banks and lend them money as needed.”

I’m not sure opposing a particular sort of healthcare reform because it will allow too many people to see a doctor is the best argument to make, it sounds a bit… I dunno I’ll let Tom Hickey come up with the right word :O)

In the political sense, it doesn’t matter if Warren wants to expand the population covered by Medicare or not (in fact, he’s proposed a catastrophic inusurance plan, like the man said you should read it), But since his plan is hard to sum up in a few words, I was just suggesting a short answer that is something both conservative and liberal voters would agree with, Medicare funding shouldn’t be cut (“expanding Medicare” could simply mean replacing the funds Obama cut im his new law).

Warren, while I agree with what you say, the fact is that politicians are hit men for the corporatocracy. They will say anything to get elected, true, false or nonsensical. All that matters is that the voters fall for it. Then after being elected, they do the bidding of their holders, and afterward exit through the revolving door to pick up their chits. Disgusting.

Such textbook is much needed for popularization purposes – the whole theory in one place from A to Z.

Tom Hickey Reply:October 6th, 2010 at 6:57 pm

Who decides what textbooks the economics students should study?

I’m not familiar with economics but in most academic fields, the choice of standard textbooks is a departmental decision. Professors can choose readings selectively, but for textbooks, they are generally limited to the textbook material that the department presumes that students are familiar with as a prerequisite to taking more advanced courses. For the most part, introductory textbooks are locked in, and most students don’t go on to take more advanced courses in economics, so Mankiw, Samuelson/Nordhaus, Krugman, Blinder, etc. are the textbooks that are favored, and their ideas become the standard.

MMT should be recognized as the theory turning economics into real science.

beowulf Reply:October 8th, 2010 at 12:44 am

Thanks guys. As for an MMT-inclusive Macro textbook, Its worth noting something eDavid Colander called the “15% rule”– /a rule of thumb dealing with the question of how much a major principles text can deviate from the “standard” principles text. The rule is: Although a new book or a new edition of an existing book has some leeway in the presentation of material, it cannot differ from the standard presentation by more that 15% and still be seen as a mainstream book. The reason behind this 15% rule is easily discernible. Changes greater than 15% require professors to change their notes and presentations by more than the large majority of professors are willing to do. Thus, there is little demand for a book that violates this rule.http://community.middlebury.edu/~colander/articles/Caveat%20Lector%20Living%20With%20the%2015pct%20Rule.pdf

Tom Hickey Reply:October 6th, 2010 at 7:01 pm

The closest text to MMT is probably Wynne Godley and Francis Cripps, Macroeconomics, which takes the sectoral balance approach. It’s long out of print, but there are used copies around. It is definitely worth looking at.

Tom, Thanks for pointing out that book. You might find what little is available from J. Fagg Foster of interest. Often people are not interested in monetary aspects at first but if I can ease them into the institutional thesis instead of the classical thesis (which includes neo-classical, Marxist, Austrian and others) then monetary-fiscal-tax policy responses make more sense to them.

Baldwin Ransom did an good job of collecting Foster’s material here: http://jfaggfoster.org/IntroBR.html. Foster preferred lecturing to writing. My primary economic mentor for over 30 years, Charles Walters received his masters under Foster in the early 50s, otherwise I would not be famaliar with him.

AFEE.net has some of the classic texts from institutionalists available.

If you have access to the Journal of Economic Issues, there is am excellent 7 page piece titled “Is Fagg Foster Still Relevant?” I excerpt a few disconnected paragraphs below.

Economists in the American institutionalist tradition believe income is determined by existing technology and institutions. Institutions are determined by a continuing
factor in human behavior: the propensity to prescribe behavior patterns to solve social problems. When an institution fails to achieve its life-sustaining function as efficiently as technically possible, people who are impacted seek to solve the problem by prescribing
new behavior patterns to increase efficiency. Possible adjustments of behavior patterns are suggested by the social theory accepted by designers of new institutions.
Thus, adjusting institutions to existing technology determines the level of income, in the sense that increasing income requires problem-solving institutional adjustments. Efficient institutional adjustments solve problems.

Foster claimed that the institutionalist and Keynesian theses both reject utilitarian value judgments that justify the propensity to save. They both hold that prior saving to finance investment is impossible and reach the startling conclusion that “whatever is
technically feasible is financially possible” (1981, 866).

Foster held that institutions are shaped by the social theory held by their creators. Every social theory endorses the efficiency of some patterns of correlated behavior and labels other patterns inefficient. Because it holds that saving determines the level of real
income, classical economic theory necessarily leads its advocates to approve institutions that promote saving and that discourage government spending. If this thesis is mistaken, it is very useful to identify those who endorse it and expose their errors. I maintain that Foster established that classical theory contains a mistake explicitly embraced by the reports here reviewed.

Identifying mainstream economics as classical is further useful because it explains why many potentially problem-solving institutional adjustments are not even considered.
Randy Wray developed a detailed proposal for government to serve as employer of last resort in such a fashion that it would raise national income, eliminate involuntary
unemployment, increase price stability, and enhance social equity. But (in part) because the policy requires permanent federal deficits, this proposal cannot even gain a hearing, much less serious evaluation. The same fate awaits many of the institutional adjustments advanced in Marc Tool and Dale Bush’s forthcoming Institutional Analysis of Economic Policy, unless many young economists are able to escape the tyranny of the
mistaken classical thesis.

Tom Hickey Reply:October 7th, 2010 at 10:09 am

Thanks for the heads up on Foster, Differ. I’ll follow up. As philosopher, I am more in agreement with economic epistemology, behavioral economics, economic anthropology, and institutionalism than with the mainstream approach, and if I have to find a fault with MMT, it is with setting itself in reaction to the mainstream, thereby adopting the mainstream stance instead of proposing an altogther different approach.

Foster held that institutions are shaped by the social theory held by their creators.

This is undoubtedly true cognitively, because institutions follow from conventions, and conventions from memes. See institutionalist Douglass C. North, “Economics and Cognitive Science.”

Social theory is shaped by a lot of factors, many of which presently are arbitrary, obsolete, and changeable. For example, the mainstream conception of economics is based on a flawed theory of man, a theory that Ayn Rand took to its logical conclusion, demonstrating its failings. As long as economics operates within that frame, constrained by the prevailing universe of discourse, it cannot produce conceptual memes, social conventional and political and economic institutions that accord with human potential. Hence, humanity will continually lag behind its potential owing to a philosophical “output gap” resulting in unemployment and underemployment of key faculties.

This is sad because there is a lot of heterodox thinking that examines the problems and offers solutions. However, this thinking is largely excluded or marginalized by the economics profession as “out of paradigm.” The big trouble is that the current paradigm supports the status quo and is supported by it, making it difficult to change even in the face of massive breakdown, demonstrating the inertia of existing institutions.